Anup Sushil Dubey vs. National Agriculture Co-operative Marketing Federation of India Ltd. & Anr - Lease Rental is Operational Debt

NCLAT (2020.10.07) in Anup Sushil Dubey vs. National Agriculture Co-operative Marketing Federation of India Ltd. & Anr. [Company Appeal (AT) (Insolvency) No. 229 of 2020] held that; 

• Therefore, keeping in view, the observations made by the Hon’ble Supreme Court in Para 5.2.1 of Mobilox (Supra), and having regard to the facts of the instant case this Tribunal is of the earnest opinion that the subject lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an ‘Operational Debt’ as envisaged under Section 5 (21) of the Code.

Excerpts of the order;

# 1. Challenge in this Company Appeal is to the Order dated 20.12.2019, passed by the ‘Adjudicating Authority’ (National Company Law Tribunal, Mumbai Bench), by which Order, the ‘Adjudicating Authority’ has admitted the Application filed by M/s. National Agriculture Co-operative Marketing Federation of India Ltd. (hereinafter referred to as ‘NAFED’), the Operational Creditor against Umarai Worldwide Private Limited, the ‘Corporate Debtor’.

# 2. Briefly put, the facts relevant to the case are that NAFED/Operational Creditor and the Corporate Debtor entered into a Leave and Licence Agreement for the usage of cold storage facilities on 01.10.2015, for a period of three years. The Agreement provides for the payment of licence fee of Rs. 9,31,000/- payable on the 7th day of every calendar month with an increase of 10% in the monthly licence fee on or after the expiry of 12 months. …….. It is the case of First Respondent / NAFED that the Corporate Debtor acknowledged and confirmed the ‘outstanding debt’ vide its letters dated 01.06.2017 and 26.02.2018, but despite several reminders and also issuance of eviction notice on 24.05.2018, the Corporate Debtor failed to make the necessary payments. Hence a Demand Notice dated 26.09.2018 in Form 3 under Section 8 of I&B Code 2016, was issued demanding payment of Rs. 1,83,45,278/- which is stated to be due from September, 2017 onwards. The Corporate Debtor in their reply dated 10.11.2018, denied all the claims and sought for renewal of the Leave and Licence Agreement.

# 10. Heard both sides at length. The main issues which fall for consideration in this Appeal are;

(a) Whether dues, if any, arising from the ‘Leave and Licence Agreement’ is construed as an ‘Operational Debt’?

(b) Whether there is any ‘Pre-Existing Dispute’ prior to the issuance of the Demand Notice?

# 11. In order to prove a ‘Debt’ as an ‘Operational Debt’ the criteria that needs to be met is as follows;

(a) Claim in respect of provisions for goods and services

(b) Employment or debt in respect of dues and

(c) Such repayment of dues which should arise under any law in force at that time.

# 13. Learned Counsel for the Appellant relied on a decision of this Tribunal in M. Ravindranath Reddy V/s. G Kishan, [Company Appeal (AT) (Ins) No. 331 of 2019 wherein it is observed that the Appellant being a tenant, having not made any claim in respect of the provisions of the goods or services and debt in respect of repayment of dues does not arise under any Law for the time being in force payable to the Central Government or State Government. It was also observed as follows;

• “31. In case of lease of immovable property, Default can be determined, on the basis of evidence. While exercising summary jurisdiction, the Adjudicating Authority exercising its power under Insolvency and Bankruptcy Code 2016, cannot give finding regarding default in payment of lease rent, because it requires further investigation”

# 14. Learned Counsel for the Respondent relied on Judgements of this Tribunal in Sarla Tantia V/s. Nadia Healthcare Pvt. Ltd. [Company Appeal (AT) (Ins) No. 513 of 2018] and in Jindal Steel and Power Pvt. Ltd. V/s. DCM International Ltd. [Company Appeal (AT) (Ins) 288 of 2017.

# 15. In Sarla Tantia V/s. Ramaanil Hotels & Resorts Pvt Ltd., this Tribunal while dealing with dues arising from the terms of the Leave and Licence Agreement held and observed it to be an ‘Operational Debt’. This Tribunal in Citycare Super Specialty Hospital V/s. Vighnaharta Health Visionaries Pvt. Ltd. has also observed that there is an admission of rent of certain periods to be due and payable which are reflected in the Books of Accounts, but subsequently, dismissed the ‘Appeal’ on the ground of ‘Pre-Existing Dispute’.

# 16. The law has not gone into defining goods or services – hence, one has to rely on general usage of the terms so used in the law, with due regard to the context in which the same has been used. Simultaneously, it is also relevant to understand the intention of the lawmakers. The Bankruptcy Law Reforms Committee (BLRC), in its report dated November 2015, indicates “the lessor, that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease”. Hence, the BLRC recommends the treatment of lessors/landlords as Operational Creditors. However, in the definition adopted by the Legislature only claims relating to ‘Goods and Services’ were included within the definition and purview of ‘Operational Debt’.

# 17. The Hon’ble Supreme Court in Mobilox Innovations Private Limited V/s. Kirusa Software Private Limited (2018) 1 SCC 353 in Para 5.2.1 observed as hereunder;

• “5.2.1 Who can trigger IRP?

• Here, the code differentiates between financial creditors and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease. The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt”

# 18. The Learned Counsel contended that ‘Lease Rentals’ are not a ‘Service’ and do not fall within Regulation 32 (Insolvency Resolution Process for Corporate persons, Regulation 2016) read with Section 14 (2) which defines essential goods or services as follows;

• (1) Electricity

• (2) Water

• (3) Telecommunication Services

• (4) Information Technology Services

To the extent, these are not direct input to the output produced or supplied by the Corporate Debtor.

# 21. The provisions of the Central Goods and Services Tax Act 2017. Schedule – II of the Act lists down the activities that are to be treated as supply of goods or services, and paragraph 2 of the Schedule stipulates as follows;

• (a) any lease, tenancy, easement, licence to occupy land is a supply of services;

• (b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.”

As the premises in the case on hand is leased out for ‘Commercial Purpose’, the cold storage owner/NAFED on collection is required to pay ‘service tax’ which is reflected in the tax invoices and ‘Ledger Accounts’ which is part of the record filed.

# 22. Therefore, keeping in view, the observations made by the Hon’ble Supreme Court in Para 5.2.1 of Mobilox (Supra), and having regard to the facts of the instant case this Tribunal is of the earnest opinion that the subject lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an ‘Operational Debt’ as envisaged under Section 5 (21) of the Code. Further, in so far as the facts and attendant circumstances of the instant case on hand is concerned, the dues claimed by the First Respondent in the subject matter and issue, squarely falls within the ambit of the definition of ‘Operational Debt’ as defined under Section 5 (21) of the Code.

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